Asian shares rebound as U.S. rate fears ebb

SYDNEY (Reuters) – Asian shares rebounded on Friday as comments from a Federal Reserve official eased worries that the central bank might raise rates more aggressively this year, while the safe-haven yen held on to its gains amid heightened volatility across markets.

Financial markets have fluctuated wildly this month as investors fretted about how fast the Fed might raise rates in the wake of data showing a pick up in U.S. inflation. That in turn has stoked anxiety that many central banks will start to tighten policy in a hit to earnings, which have boomed thanks to a synchronized uptick in global growth.

MSCI’s broadest index of Asia-Pacific shares outside Japan climbed 0.4 percent, but was still on track to end the week barely changed.

Australian and New Zealand shares were each up 0.5 percent while Japan’s Nikkei edged 0.3 percent higher and South Korea’s KOSPI index rose 1 percent.

Asian shares took a knock on Thursday after minutes of the Fed’s last meeting showed policy makers were confident about the economic outlook, prompting some investors to boost the odds of faster rate hikes.

The Fed started tightening its ultra-loose policy at the end of 2015 after keeping rates on hold for almost a decade. It raised interest rates three times in 2017 and is likely to tighten again in March.

St Louis Fed President James Bullard tried to tamp down of expectations of four rate hikes in 2018, instead of the widely anticipated three increases, saying on Thursday policymakers need to be careful not to increase rates too quickly because that could slow the economy.

That was enough to send U.S. shares rallying, despite the negative lead from Asia and Europe.

On Wall Street, the Dow added 0.7 percent, the S&P 500 ended a tad firmer while the Nasdaq lost 0.11 percent.

Analysts expect the market to be in a “holding pattern” ahead of a slew of important U.S. January activity data on Tuesday, followed by global surveys on manufacturing activity on Thursday.

BONDS AND CURRENCIES

“We think inflation and yield fears are overblown near term,” JPMorgan analyst Marko Kolanovic wrote in a note.

“However, speculators have amassed the largest short position in the history of bond futures trading. With such a large short position, there is always risk of profit taking, or worse a proper short-squeeze.”

Bond prices gained, sending benchmark U.S. Treasury 10-year yields down from a four-year high of 2.9570 percent.

In the foreign exchange market, the dollar index, which measures the greenback against a basket of currencies, was flat at 89.736, with the euro a touch softer at $1.2324 after rising 0.4 percent on Wednesday.

“Movements in EUR/USD seem to be mirroring movements in US equities, rising when equities sell off and weakening when they rally,” ANZ analysts wrote in a note to clients.

The yen, which tends to benefit during times of heightened volatility or uncertainty, rose almost 1 percent overnight to last fetch around 106.8 per dollar.

In Germany, Europe’s biggest economy, data showed business confidence fell more than expected in February.

Though Germany is set for solid growth in the first quarter, diverging monetary policy expectations with the United States sent the “trans-Atlantic spread” between German and U.S. 10-year borrowing costs to 222 bps, the highest in more than a year.

Oil prices eased from two-week highs. [O/R]

U.S. crude was down 13 cents at $62.64 per barrel and Brent was last at $66.39. Spot gold ticked lower to $1330.26 an ounce.